How To Start Budgeting in 5 Easy Steps

Managing your personal finances can be a daunting task. Unexpected expenses can be very damaging to your monthly spending. The key to not overspending is creating a budget. Learn how to create one in 5 simple steps.

Published on 2022-09-22

Budgeting is an excellent way of managing your finances practically and efficiently. It doesn’t require deep knowledge of complicated subjects like math or economics, and it doesn’t mean being restrictive with your expenses. Quite the contrary: a budget is a method of tracking your spending and responsibly enjoying your money.

In this article, you’ll learn all about how having a budget can help you and how you can get started. But first, let’s define what a budget is.

What Is a Budget?

A budget is a microeconomic concept that estimates expenses and earnings over a specific period. In other words, it’s an approximate calculation of how much you’ll make and how much you’ll spend during a year or month. But budgets are not specific to people or families. Businesses and governments also use them to perform at the best efficiency.

Moreover, it’s a versatile concept in the sense that there are many ways to budget according to your distinct necessities.

Why is Budgeting Important?

Having a budget can impact your economy in many ways. Above all, budgeting is essential for avoiding debt. Understanding how much money you have available and where you need to put it ensures you don’t overspend. Furthermore, controlling your expenses helps develop responsible spending habits. A budget also leads to a healthier relationship with money, as it frees you from viewing it as a source of stress. Finally, budgeting can help you prepare for unexpected bills by securing a basis of income to fall back on.

Now that you're familiar with the concept of budgeting and its benefits, how do you get started?

1. Calculate Your Gross Income

The first step is to estimate your gross income, that is, how much you earn per month without taxes or deductions. If you have an annual salary, take your earnings and divide them by twelve. If your employer pays you twice a month, take your gross monthly income and divide it by two. And if your wage fluctuates, calculate an average based on what you earned in prior months.

2. Track Your Spending

Before crafting a budget, you should know how you usually spend your money. Based on that, you can determine your fixed expenses from those that vary each month. For example, rent and utilities are essential and have a somewhat stable cost. But groceries and credit card payments tend to be flexible. Calculating your monthly expenditures gives you a baseline for your spending budget.

3. Set Financial Goals

Another pivotal part of budgeting is establishing what you want to do with your money. Think about long-term financial goals, such as saving for retirement or buying a house. For better results, make them specific and include a deadline. This will motivate you and help you build your budget around the things you want to achieve.

4. Decide How Much To Save

Once you've selected your financial goals, determine how much money you can set aside for them. Remember that specificity is essential. Choose a precise amount according to your earnings, and be consistent. If you don’t know how much to save, you can devote a fixed percentage of your monthly wage toward your goals.

5. Make and Implement a Budgeting Plan

Following the preliminary work, you can begin to map out and execute your budgeting plan. There are many kinds of budgets, so choose the one that best fits your necessities. The most popular is the 50-30-20 approach. Under this budget, 50% of your income goes to essential expenses (or needs) like rent or a mortgage. 30% goes to optional expenditures (or wants) like trips or nights out and 20% to savings.

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